Chapters 380 and 381, Local Government Code, permit municipalities and counties to make loans and grants of public money for the purpose of incentivizing local economic development. Chapter 380 and 381 agreements are popular tools because they give local governments wide latitude to structure economic incentives beyond the more limited parameters of Chapter 312 tax abatements (though 380/81 agreements may also involve 312 abatements) or Chapter 311 tax increment financing arrangements.
A recent decision by the Tyler Court of Appeals took up a taxpayer challenge to a Chapter 381 agreement on the basis that it granted the property owner a tax abatement in the guise of a grant of public money without complying with Chapter 312’s requirements and limitations on tax abatement agreements. Cynthia Martin v. Hopkins County, et al. (No. 06-22-00022-CV) arose from an agreement between the county and a solar power developer, Hopkins Energy, LLC, under which the developer agreed to invest $240 million in a power plant in return for reimbursement of 100% of the developer’s property taxes for a ten-year period. Martin sued the county, the county judge, and the county commissioners alleging that they committed ultra vires acts because they failed to comply with § 381.004(g), which requires the commissioners court to comply with applicable sections of Chapter 312 if they enter into a tax abatement agreement. The county countered (and the agreement with the developer so specifies) that it acted under the authority conferred by § 381.004(h), which authorizes the county to “develop and administer a program . . . for making loans and grants of public money and providing personnel and services of the county.” The trial court granted the county’s traditional motion for summary judgment. The taxpayer appealed.
The court of appeals affirmed. Its analysis reviewed the statutory language and the text of the agreement. First, the court determined that § 381.004 is not ambiguous. Neither the term “abatement” in § 381.004(g) or “grant” in § 381.004(h) have any special definition in the statute and must be construed according to their common meaning. A tax abatement “either reduces or nullifies the requirement to pay taxes.” A grant, on the other hand, refers to “a gift (as of land or money) for particular purpose.” A “grant of public funds” clearly includes property tax revenue as a source of public funds. Turning to the language of the agreement, the court found that it unambiguously required the property owner to pay 100% of its property tax liability at the risk of default under the agreement. If it complied with other provisions of the agreement governing the amount of investment and number of jobs created, the developer would receive an annual grant in the amount of 100% of the property taxes it paid to the county.
The court rejected the taxpayer’s argument that this 100% reimbursement of property taxes amounts to the same thing as a 100% tax abatement. “In our view,” the court opined, “a plain reading of the Agreement established both that the Developer was required to pay the full amount of ad valorem taxes due each year and that it would not be entitled to any grant or reimbursement unless it did so and unless it met its other obligations under the agreement, including maintaining two full-time equivalent employment positions.” The obligation to pay taxes, the court concluded, was not “reduced or nullified” as it would be in a tax abatement agreement. In support of this distinction, the court pointed to two AG opinions, one from John Cornyn and the other from Ken Paxton, that made the same distinction based on the fact that under a tax abatement agreement the property owner does not pay the tax. The use of a formula that ties the amount of the grant to property taxes paid simply assures that the county, in this case, “would never obligate itself to make payments over the amount of ad valorem taxes collected in the prior year, which could potentially create debt.” Moreover, according to General Paxton’s opinion (KP-0261), “the duration and amount of economic development loans and grants” are up to the commissioners court, where as the legislature has limited tax abatement agreements.
This decision correctly, in our view, applies Chapter 381 as the legislature intended. We do wonder whether the case has any connection to the broader political debate over tax incentives in general and what other challenges might be in the works.
